All posts by Roger Altman

It is hard to find someone who is not pessimistic about America. Two-thirds of our citizens see the country on the wrong track, particularly because they hate Congress and do not much like the president. Internationally, there is much hand-wringing over American decline.

Such gloom mistakes Washington for the country as a whole – an error that has often been made during the periods of federal dysfunction that are a recurrent theme of US history. We are again hearing that because Washington is stuck, the country is too. Read more

Tuesday Barack Obama will deliver his sixth State of the Union address. Expectations are not running high. Congress is gridlocked, the president’s poll standing is tepid, and 2014 is a year of midterm elections when partisanship usually rises. Moreover, the focus of the speech will probably be income inequality – an issue that Mr Obama calls “the challenge of our time” and which is a popular topic among Congressional Democrats. And yet little or none of the related legislative agenda outlined on Tuesday has a chance to get passed by this Congress. As a result, Mr Obama will be forced to highlight modest executive actions which don’t require legislative approval. Read more

It is strange to see the equivalent of a political campaign over succession at the US Federal Reserve. After all, the chair is a presidential appointment, subject to Senate confirmation. It is not an election and, in the past, deliberations over these appointments have always been private. However, leaks have fed a widespread perception that President Barack Obama will soon nominate either Lawrence Summers, his former chief economic adviser and former Treasury secretary, or Janet Yellen, the current vice-chair of the Fed board of governors, to the four-year term that begins in late January. Supporters of each, including some in the White House, are campaigning publicly, trying to sway the president.

But this decision should not involve popularity or politics. Nor, like Supreme Court appointments, does it need to consider questions of balance. And it is not, like cabinet appointments, a matter of appointing an adviser to the president. Quite the contrary. The Fed is both independent of the executive branch and, more important, the most powerful group of financial firefighters on earth. So its chair is the world’s most important crisis manager. It was the Fed’s massive intervention that saved the world from a full-on global depression, following the collapse of credit markets in late 2008. Given recent history, it is just a matter of time before its emergency tools are required again. Read more

In further responding, let me emphasize that my argument is not pro-austerity or anti-austerity. Not at all. Rather, the main point which I tried to make is that financial markets originally pushed austerity onto the weaker nations, not politicians. A careful review of the timeline in this eurozone financial crisis bears this out. Read more

Criticism of austerity has reached ferocious levels in Europe. Increasingly, it carries a moral tone, portraying the stronger north, especially Germany, as forcing harsh policies on to weaker nations. Opponents of austerity argue that the north is demanding fiscal tightening and labour market reforms from these stricken states in exchange for vital lending from entities such as the European Central Bank. They see it as kicking economies when they’re down. Read more

Barack Obama might prefer to focus his energies on immigration, gun control and education. But it is the tax and spending wars that still paralyse Washington, and the US is on the verge of a dismal solution – the sequestration. Unless a new budget deal can be agreed within the next few days, almost all forms of so-called “discretionary” spending, departmental budgets that the US Congress sets each year, will be cut equally and indiscriminately – beginning next week. Read more

The last-second deal to avoid America’s fiscal cliff has been criticised by budget experts, the business community and the press. In the face of deficits still exceeding a breathtaking $1tn annually, they had hoped for a “grand bargain” – namely, a long-term, multitrillion-dollar package of revenue increases and spending cuts that would truly fix the debt problem. That did not happen. Instead, the deal is seen as too small and unbalanced, as it raises only modest amounts of revenue and cuts no spending. Outside Washington, no one has a good word for it. Read more

Dismal jobs numbers reflect a fundamental lack of economic growth. Three full years have now passed since the trough of the recession. But, the US grew at only 1.9 per cent and an estimated 1.5 per cent for the first and second quarters of this year, respectively. For the full year, the consensus estimate is only 2 per cent. Such figures, well below the economy’s long run growth potential, are just not good enough to offset population growth and improve labour markets.

The obvious question is: why such a weak recovery? The answer traces back to the catastrophic 2008 credit market collapse. Namely, that the financial damage which it inflicted on consumers, lenders and homeowners has not been fully remedied. And, therefore, each of these three, broad sectors is struggling. Read more

Everyone hopes that the €100bn bailout of Spanish banks will calm the eurozone financial crisis and buy enough time for the further fiscal, banking and other integration that is required. That is possible but, unfortunately, it isn’t likely: firstly, because of the structure of the bailout; second, because it does nothing to resolve the issues at the heart of the eurozone crisis; and third, because in big financial crises, markets often determine that rescues such as this are not enough. I hope I am wrong, but this is unlikely to be a turning point for the eurozone.

President Obama releases the politically-weighty final budget of his first term on Monday. It covers the fiscal year beginning October 1 and also contains long-term budget projections. There are four key points to understanding it. It is as much a campaign document as an actual budget. None of the major proposals it contains will pass Congress in this presidential election year. The poor fiscal outlook for the US will be starkly confirmed. And, the key budget date in 2012 is not now, or mid-year, but December 31. That’s when some major tax cuts expire, the mandatory budget cuts triggered last year commence and legislation raising the federal debt limit will again be needed.

The main cause of these deficits is the financial collapse of 2008 and the Great Recession that followed it. Indeed, the US economy is still very weak, having grown only 1.6 per cent last year. That’s why this new budget will propose one last round of fiscal stimulus ($350bn in tax cuts and spending increases) to accelerate recovery. That would be followed by $3,000bn of deficit reduction actions (half of which would come from tax increases on individuals), beginning next year. This approach of stimulus now and long-term deficit reduction soon thereafter is, in my view, the correct one. Read more

Technology is profoundly changing the world’s energy equation, and all its geopolitical implications. Energy efficiency in the advanced countries has risen sharply, implying that their demand has peaked, and vast discoveries of oil and gas have been made in politically stable areas, including in the US. This suggests that in future, gas will account for a much larger proportion of the world’s energy supply. While these developments are positive for geopolitical stability, they may pose difficulties for the climate.

The environmental implications of these new technologies are not yet clear. The movement towards renewable energy sources, nuclear power and climate stability may be slowed by the new abundance of oil and natural gas, and the relatively low price of gas. Even in 2040 respected forecasts now envision that fossil fuels will still supply 80 per cent of the world’s energy needs.

However, energy security and national security for much of the world will be improved, as the influence of rogue oil states diminishes. That is quite a plus. Read more

The financial crisis struck the US harder and more quickly than it did Europe. The complete freezing of credit markets required an immediate and overwhelming intervention – and the American fiscal and monetary authorities delivered it. Between the Federal Reserve, Treasury and the FDIC, approximately $13,000bn of credit support was arranged for financial institutions in late 2008 and 2009. There was no alternative to this massive reaction, and it worked. US credit markets are now healthy, and the recapitalised banking system is stable. History will look favourably on the boldness of America’s response.

In contrast, the European Union has had much more time to strengthen its financial institutions but hasn’t developed any of the necessary tools. As a result, the world has watched a steadily deepening sovereign debt problem metastasise into a full blown banking crisis. Global markets fear big losses on bank holdings of sovereign debt. And, total liabilities of eurozone banks are now estimated to exceed 300 per cent of the region’s gross domestic product. That’s exponentially higher than the comparable US ratio at the worst moment in 2008.

Germany and France recently committed to producing a bank rescue plan by November 3 but have provided no details. This is a golden chance to redeem the fading credibility of Europe’s leaders. Especially if they apply the lessons of America’s banking intervention. Both what went right and what went wrong. Read more

Interest rates on US, German and UK government bonds have fallen to all-time lows. Yields on 10-year US Treasury securities are the lowest since the Federal Reserve began publishing market data in 1953. Only the anticipation of negligible demand for capital and negligible inflation – both hallmarks of recession – could drive rates this low.

The debilitating sovereign debt crisis in Europe is pushing it and America back towards the brink. It is causing credit conditions to tighten again for sovereign credits, weaker borrowers and small and mid-sized business. The crisis was avoidable but Europe’s leaders chose to delay, take the tiniest steps possible and generally avert their eyes to the elephants in the room. America’s leaders have also spent too much time on partisan bickering. It must stop. One last round of fiscal stimulus should be enacted immediately.

Another recession would be profoundly damaging to labour markets and public confidence. It would take years to fully overcome. We must try to avoid such an outcome at all costs. That requires the type of far-sighted leadership that we haven’t seen much of lately. Read more

Finally, America is on the verge of a major step towards reducing its dangerous and long-term fiscal deficits. This was seen as impossible six months ago. But, a combination of growing public antipathy to deficits, and, in particular, fierce opposition to raising the federal debt limit this summer has changed the environment and put Congress into a bind. It must raise the debt ceiling to enable continued national borrowing and avoid a catastrophic default. So, for political protection, its members now want to deliver a simultaneous, large deficit reduction package. Negotiations focus on $1,000bn-$2,000bn of reduction over 10 years, against an August 2 deadline on the debt limit. It may occur at the midnight hour, but an agreement is likely.

But this impending agreement should include two additional features which, until recently, would have been unnecessary. The first concerns the year in which deficit reduction kicks in. Remember that it is, in theory, contractionary. This suggests that the start date should be deferred. Instead of immediate reductions, an effective date of 2013 makes more sense, in the expectation of a stronger economy. Second, the three one-year stimulus measures passed in last winter’s special Congressional session should be extended one more year. Read more

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